Turkish Lira Drops as Political Turmoil Takes its Toll

1BUSINESS

Political turmoil in Turkey and the country’s escalating dispute with the Trump administration spilled into global financial markets on Friday, driving the country’s currency to a record low.

The plunge in the Turkish lira raised fears that Turkey’s problems could affect Asian and European banks that have invested in the region, and it contributed to declines in stock markets around the world. It was the latest example of how troubles in a country with a relatively small economy but big problems could threaten financial stability further afield.

On Friday, a dollar briefly bought more than six lira, a record, though the Turkish currency later recovered some of its losses.

Over all, the currency has lost more than 15 percent of its value against the dollar this week. The yield on Turkish 10-year bonds has also risen sharply, to nearly 20 percent, meaning traders are demanding much higher returns for what they see as an increasingly risky investment.

The loss of confidence in the lira can be at least partly attributed to Turkey’s clash with the United States over the detention of an American pastor, Andrew Brunson, who was swept up in a crackdown after the failed attempt in 2016 to oust President Recep Tayyip Erdogan.

Washington has imposed sanctions against two ministers in Mr. Erdogan’s government, and Ankara has retaliated. Representatives of Turkey and the United States met in Washington this week but failed to resolve the conflict.

“The associated diplomatic row continues to hurt the country’s assets,” Jim Reid and Jeff Cal, analysts at Deutsche Bank, said in a note to investors on Friday. “Countries that are in a diplomatic battle with the U.S. at the moment (e.g. China, Turkey and Russia),” they wrote, appear “to be suffering in the markets.”

But Turkey’s problems go much deeper than its relations with the United States, a NATO ally.

There is widespread fear among foreign investors that Mr. Erdogan’s populist, authoritarian government is pursuing irresponsible economic policies while undercutting the independence of the central bank. That, analysts fear, is preventing the country from taking necessary steps to put the economy on a more stable footing.

In an example of his increased role, Mr. Erdogan has resisted calls for a rise in interest rates to curb inflation and to ease pressure on the lira.

The sharp decline of the lira, and worries over the wider consequences of economic turmoil in Turkey, helped drive the main stock indexes in Tokyo, Frankfurt and Paris more than 1 percent lower.

As was the case when Greece helped cause a financial crisis, the reaction in the markets was disproportionate to Turkey’s importance to the world economy.

Investors fear that banks in Asia and Europe could suffer because they have invested in Turkish assets like stocks, bonds or the currency itself. Problems at banks could then spread to other sectors of the economy.

Mr. Erdogan has, however, dismissed concerns over declines in the country’s financial and economic prospects. In a speech on Thursday, he blamed outsiders for the country’s difficulties and insisted that Turkey would weather the current storm.

“They have various campaigns” against Turkey, Mr. Erdogan told a crowd of supporters in Guneysu, a town in the northern province of Rize, where his parents are from. “Do not lend an ear to them.”

“Don’t forget, if they have the dollar, we have our people, our Allah,” he continued. “We have worked hard, and we are working hard.”

“Where were we 16 years ago,” he said, referring to his first election triumph, “and now where are we?”

His speech was quickly lampooned on social media, however. “When the landlord asks for the rent, is it possible to pay just by saying, ‘You have your apartment, but we have our Allah?’ ” Iskender Baydarwrote on Twitter.